Written by
Anthony Ra
Published on
December 12, 2023
Account Lifecycle: What happens to old bank accounts?
Think about all the accounts you have ever created in your life - there’s a good chance several have fallen by the wayside. Ideally, you’d actively close an account when it’s no longer needed. More often, it wasn’t an active decision to stop using the account and you just, kind of, forgot about it and went on with your life. For most accounts, especially those without recurring fees, this has little immediate impact.
For financial institutions, however, the end of an account's lifecycle is anything but simple.
Financial institutions are bound by various regulations throughout an account's lifecycle, from creation to closure. While many of these regulations, like account maintenance and fraud prevention, are well-known, dormant account management often remains in the background.
Yet, as the rise of fintech has made account creation and transactions easier than ever, escheatment has become increasingly significant for financial institutions.
Consider John Doe, who opens a new checking account and successfully adds funds to his account. This begins a cycle of activity that John conducts within his account such as logging in, reaching out to customer service, and using his debit card. With each recorded activity of a valid type, the account’s last activity date resets.
Each account has a state and property type specific dormancy period predicated on the last activity date. So let’s say the account that John Doe opened is a checking account from Arizona. Based on Arizona law, the dormancy period of that account is 3 years from the last activity date. If John’s last activity date was December 17, 2020, by the time 2023 rolls around, that account is on the cusp of transitioning from inactive to dormant according to state law.
As his account nears dormancy, the holder (the financial institution “holding” his account) will identify that account as potential Unclaimed Property, and may make efforts to re-engage John. These efforts may include outreach to John in the forms of email, mail, phone, and/or additional incentives.
If John responds to any of the outreach, the response may count as activity, thus resetting the dormancy clock. Since this is optional, some holders may have a recurring cadence regarding informal outreach, but others may only do the legally required minimum.
If an account reaches the state-defined period of inactivity, it’s classified as Unclaimed Property, the holder must proceed with reporting this account to the state in a process often referred to as “escheatment.”
Escheatment involves transferring unclaimed funds to the state. It requires precise actions and adherence to deadlines, and failure to comply can lead to financial penalties and compliance issues.
If we fast forward past December 17, 2023, John's account is now considered Unclaimed Property, but he's unaware of this. While John faces no legal penalties, the bank must act or else face fines, penalties, and audits.
The holder, on the other hand, has to meet and document the requirements for each state. Before reporting an account for escheatment, the bank must send a due diligence letter to the account holder. This is a formal notification of the account's inactivity and impending transfer to the state. Typically, most states require physical mail and may require it for any account over a $0 balance. In Arizona, this letter should be sent at least 120 days before the November 1 reporting date, which would be by July 4, 2024.
This due diligence process may help to reactivate and recover John’s account if he responds to the letter. In this instance, the “Unclaimed Property” label gets dropped, and the dormancy period resets.
Sadly, John does not respond and there is no activity that would count as contact. The bank proceeds with the formal reporting and remittance process.
John’s account is frozen, and the information it contains is included in a report to Arizona by the deadline of November 1, 2024. The funds from his account are then remitted to the state. The silver lining for John is that should he want to retrieve his funds, he can contact the State to start the claim process to recover them.
Now, imagine a bank managing this process across thousands, perhaps millions of accounts – each subject to different state regulations, dormancy periods and reporting deadlines.
Take into account that each State may have different due diligence letter formats, methods of report delivery, and wiring instructions, and offboarding accounts can get very overwhelming. The process becomes incredibly complex, especially for banks operating nationwide or partnering with third parties to deliver digital experiences.
While account owners have a relatively straightforward journey - open, use and possibly forget the account - the journey for financial institutions is a lot more complicated, and the right tools are important to maintain compliance without overly burdening operations teams.
